Government Assistance Increases Wages

All too frequently the argument is made that government assistance programs subsidize low wage employers. That is, firms like Wal-Mart, McDonalds and Target, to name just a few, are able to pay very low wages precisely because management knows that their low paid employees will qualify for Medicaid, food stamps (officially known as the Supplemental Nutritional Assistance Program) and other such public assistance. As a result, it’s assumed that these public programs allow firms to pay lower wages than would be possible were these programs not to exist. To be blunt, this position is completely wrong.

Rather than subsidizing low-wage employers, public assistance programs generally reduce the supply of low-skilled workers who are willing to work for low pay and poor benefits. This is because in many cases, benefits are more generous when family incomes are very low or zero. As family income rises, benefits are frequently cut back or eliminated entirely. By reducing the pool of workers willing to take poorly paying jobs, Medicaid and most public assistance programs tend to increase, rather than decrease, wages at the bottom of the pay scale. Were these programs not to exist, the unemployed would be more eager to work than they currently are, and thus more willing to work at a lower wage.

Again, the availability of health insurance, food stamps, and other assistance when work is not a requirement means that paid employment is somewhat less attractive than would otherwise be the case. Moreover, the fact that in many cases benefits are reduced as earnings rise means that work is financially less rewarding to these households than it is to unsubsidized households. In short, programs that offer more generous payments to those with no earnings than to those with higher incomes reduces the supply of workers willing to work at very low pay. This is quite the opposite of a subsidy to low-wage paying firms.

Two programs that are exceptions to the above are the Earned Income tax Credit (EITC) and childcare subsidies targeted at working families with low incomes. Because benefits are only paid to families with a parent who is employed, these programs encourage work. By boosting the supply of low-wage labor, these programs increase labor supply and thus decrease wages. However, these programs are not really subsidies to low-wage employers. Rather, they are programs that offer inducements for low-wage workers to enter the job market and take jobs that do not offer adequate pay by making it financially advantageous to do so. The goal of the EITC is to improve the standard of living of low-income families and encourage work, without fear that as a result of a rise in earned income, public benefits will be lost. In this way the EITC makes work pay.

In conclusion, public assistance programs that offer benefits to non-working Americans reduce the incentive to work, thus boosting wages. Similarly, programs that dramatically reduce benefits as household income rises also boost wages by making work less attractive. There are no subsidies here. While programs that incentivize work, like the EITC, increase the supply of workers and thus decrease wages slightly, calling such programs employer subsidies is essentially mistaking the bathwater for the baby.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com.